On Monday, Chairman Hensarling circulated a memorandum to the House Financial Service Committee Leadership Team suggesting key revisions to the CHOICE Act. It only addresses proposed changes to the CHOICE Act; several key features of the original version, including subjecting the CFPB to congressional appropriations, remain in place but are not addressed in the memorandum. The proposed changes would, however, affect key features of the Dodd-Frank Act, including capital requirements, stress tests, and the Consumer Financial Protection Bureau (“CFPB”). Several proposed changes to the CFPB differ significantly from the original version of the CHOICE Act. https://tinyurl.com/zcf52ob

The most striking difference between the memorandum and original CHOICE Act is the proposed structure of the CFPB. A key feature of the original CHOICE Act was replacing the single director with a bipartisan, five-member commission, similar to the FCC and FTC. https://tinyurl.com/hq4lkfg. The current proposal abandons that approach in favor of a “[s]ole director, removable by the President at-will,” effectively codifying the panel opinion in the PHH appeal. https://tinyurl.com/hyw3tw5.

The creation of a commission had wide industry support but was controversial among congressional Democrats. https://tinyurl.com/jdtwuaz. It is somewhat surprising that Chairman Hensarling would abandon a key provision of the original CHOICE Act, but the decision may reflect a political calculus. The CHOICE Act was first introduced in July 2016, when we had a Democratic President and Hilary Clinton was reported to be the clear frontrunner. It was widely believed that, given the opportunity, Mrs. Clinton would appoint a Director with views similar to those of Director Cordray. Now, however, Republicans control both houses of congress and the presidency. Making Director Cordray removable at will would allow President Trump to appoint a sole director who would have far greater ability to roll back Cordray-era measures than would a bipartisan, five-member commission.

Other proposals set forth in the memorandum would have a greater impact than making the director removable at will. The memorandum proposes restructuring the CFPB as a “civil law enforcement agency similar to the Federal Trade Commission.” It is not clear what, exactly, is meant by “civil law enforcement agency.” But other reforms proposed in the memorandum indicate that the intent is to eliminate the CFPB’s authority to supervise banks and non-banks and to curtail greatly the CFPB’s rulemaking power and largely limit it to enforcing existing statutes and regulations:

Enforcement powers limited to cease and desist and CID/Subpoena powers

Mandatory advisory boards repealed

Elimination of consumer education functions

Market monitoring authority repealed

Research function eliminated

Strengthen the existing Dodd-Frank language that the CFPB’s jurisdiction does not include entities regulated by the SEC or CFTC.

These proposals would drastically alter the CFPB and make it a less powerful and robust agency. The direct, consumer-facing aspects of education and complaint handling would largely be eliminated. The CFPB would also have a much smaller role in monitoring and researching financial markets; presumably, those functions would lie primarily with the Federal Reserve. The CFPB’s rulemaking authority would be reduced greatly, and its supervisory authority would be eliminated entirely. It would retain some enforcement authority, but its preferred enforcement mechanism – UDAAP – would be unavailable and it appears that the CFPB would be unable to obtain any monetary relief for consumers or civil money penalties.

Eliminating the CFPB’s UDAAP authority would have a significant impact on one of the most controversial aspects of the CFPB, which its critics have termed regulation by consent order. UDAAP allows the CFPB significant discretion to determine what is and is not an unfair, deceptive, or abusive act or practice. This broad authority allows it to find conduct illegal that is not prohibited by a more narrowly tailored statute, such as the Fair Debt Collection Practices Act or Fair Credit Reporting Act. Eliminating UDAAP would require the CFPB to rely on more specific statutes and regulations in enforcement actions, thereby reducing its ability to create new regulatory expectations through enforcement actions. Indeed, the impact of eliminating UDAAP authority may explain why the memorandum includes a proposal to “[r]e-draft Section 415 to prohibit any SEC rulemaking by enforcement” but does not include a similar restriction with respect to the CFPB.

Restricting the CFPB’s rulemaking authority may have a significant impact on rules that are in the pipeline. The Small Dollar Rule and Arbitration Rule both rely exclusively on the Dodd-Frank Act, and would therefore not be permissible. The Outline of Proposals related to debt collection could partially be grounded in the Fair Debt Collection Practices Act, but the CFPB would not be able to rely on UDAAP or other Dodd-Frank authority. This also means that the CFPB would not be able to issue a rule regarding first-party (i.e., creditor) debt collection, as it would have to rely on UDAAP. We have blogged extensively on this proposed and contemplated rulemaking activity. https://tinyurl.com/zrho39l; https://tinyurl.com/gvoq7mp; https://tinyurl.com/jcjm672

At the end of the day, neither the original CHOICE Act nor the proposed amendments to it are likely to pass in the Senate. Republicans currently hold a narrow, 51-49 majority, and would need to pick-up several Democratic votes to overcome a likely filibuster unless the Republicans “go nuclear” – that is, change the Senate rules to eliminate the ability of the Democrats to filibuster the bill. Less ambitious reforms may be feasible, but fundamentally re-shaping the CFPB will likely prove difficult with the current makeup of the Senate. We also do not know what changes President Trump would like to make to the CFPB.

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